Stock Market Looks a Little Stretched

By Mitchell Clark, B.Comm. — Ahead of the Street column

Don’t be surprised if the Dow Jones Industrial Average consolidates for quite a while around the 11,000 level. There have been a lot of solid earnings so far, but, as is always the case, the market’s already speculated on this reality. Even those companies reporting blowout quarters aren’t seeing major moves in their stock prices. This is a sign of a market environment that’s a little tired and stretched. Some of the economic data haven’t been that rosy lately and it is a reality check for the stock market. Most economists expect that quarterly GDP will slow over the coming quarters, so we have a long way to go before investors get excited about what’s happening on Main Street. Realistically, I view the economic outlook as low and slow for the foreseeable future.

As I’ve been writing, for equity speculators, there aren’t a lot of standout buys in this market. Large-cap stock prices have moved significantly higher since February and I’m noticing small- and mid-cap issues suffering from a lack of investor enthusiasm. It’s another signal to me that this market is worn out.

I wouldn’t be surprised if we get a stock market correction soon after earnings season. We’re due for one. At the very least, we’re due for a solid period of consolidation. The stock market’s been running significantly higher since the March low set in 2009. And, while this is still a recovery from the previous over-correction, the S&P 500 has gone from under 700 to 1,200 in just over a year. That’s a big move in any market.

We’re also getting some confirmation from oil prices, which have been a great near-term predictor for stock prices. The price of oil is still over $80.00 a barrel, but it’s been pulling back over the last few weeks, and it fits my view that the equity market looks tired.

There isn’t a need for investors to do much in this market. Other than owning the index, of which you can reinvest the dividends, I’d be sitting on the sidelines waiting for a stock market correction. If we get a meaningful pullback, this would be a good opportunity to consider taking on some new positions.

The speculative end of the market is certainly suffering from a lack of investor enthusiasm. I notice this particularly with U.S.-listed Chinese stocks. I still like the mining sector, and a number of companies I follow in this sector are outperforming the stock market.

I don’t think anyone has to be in a rush to do anything new with stocks at the moment. The market needs a bit of a break and I think we’ll get one soon enough.